DETERMINANTS OF EXCHANGE RATE FLUCTUATIONS FOR VENEZUELA: APPLICATION OF AN EXTENDED MUNDELL-FLEMING MODEL

Applying and extending the Mundell-Fleming model, this study attempts to examine the behavior of short-term real exchange rates for Venezuela. It finds that the real effective exchange rate is positively associated with real government deficit spending and negatively influenced by real M2, the world interest rate, county risk, and the expected inflation rate. Hence, the authorities need to exercise fiscal discipline so that deficit spending would not be too large to cause real appreciation and hurt exports. When country risk rises due to the financial, economic or political factors, real exchange rates would depreciate.